April 18, 2011

FT: Case study: Porter Airlines

Case study: Porter Airlines

The story. In 2006, aviation entrepreneur Bob Deluce launched Porter Airlines, a low-cost carrier, into the already crowded North American market.

The challenge. Several small, low-fare airlines had started in Canada to compete with the two dominant carriers: Air Canada, the national flag-carrier, and WestJet, a low- cost airline modelled on Southwest Airlines. Most start-ups focused on high-density routes and tried to gain market share by pricing lower than incumbents. This triggered fatal price wars with incumbents, and most observers were sceptical about Porter’s ability to take them on.

The strategy. Porter executed a classic strategy of finding an untested market space that avoided competing on price. Porter’s slogan, “Flying Refined”, reflected its tactic of providing a high-quality flying experience for economy-class fares. Perks included free wine and snacks on board, large airport lounges – with free WiFi, computers and espresso machines – and a frequent-flyer programme.

Much like Southwest, Porter recruited crew and ground staff with the right attitudes to customer service first and then training them for the job.

Porter’s best-value proposition was to base itself at Billy Bishop Toronto City Airport, a small airport located on an island in Lake Ontario, just five minutes’ drive – including a ferry trip – from downtown Toronto. Porter targeted business passengers travelling to and from the commercial capital of Canada during the week. It highlighted the contrast in terms of time and money with using the main Toronto airport – nearly an hour’s drive on a busy highway.

Porter purchased the shabby terminal building at the airport from the airport authority and, after a $50m refurbishment, converted it into a modern facility optimised to speed travellers through check in.

Until recently, it kept other airlines from using the terminal. It was embroiled in a dispute with Jazz, an Air Canada affiliate, which claimed it was unfairly being stopped from using the airport.

Air Canada recently received approval to launch from the airport and Jazz is poised to start a service to Montreal.

Business travellers came to rely on being on board less than 45 minutes after leaving downtown Toronto. Porter estimates that 1.3m passengers used the terminal in 2010.

Finally, Porter’s fleet of new Bombarbier Q400 turboprops were fitted with leather seats and extra leg room. Commercial jets are not allowed at the airport because of noise restrictions. Porter’s Q400 aircraft used vibration-cancelling technology to provide ride quality comparable to jet aircraft. The Q400 also has superior fuel efficiency to jets of comparable size.

Results. Porter launched in the high-density Toronto-Ottawa-Montreal market and offered high frequencies on these routes. It used heavy advertising in the target markets to woo early adopters who would become advocates. Porter later expanded scheduled services to six cities in eastern Canada as well as New York, Boston and Chicago. It is reported to have reached cash break-even two years after starting up, and is now reported to be profitable.

Porter’s main challenge now is to continue to grow without triggering a price war with Air Canada and WestJet, which may try to stop its erosion of their market share on key domestic and cross-border routes.

Key lessons. Even in a highly competitive market, it is possible for a new entrant to prosper if it can differentiate itself in a way that is difficult to copy.

Porter’s big advantage is its base close to the heart of Toronto, where it has locked up a majority of the landing slots and owns the terminal.

Other advantages were its focus on building loyalty early among its target audience, and the affordable Q400s that are well suited to its route structure of short-haul journeys.

The writer is professor of strategic management at the Rotman School of Management at the University of Toronto